Illinois Legislature Outsmarts Illinois Court of Appeals

In 2013, Illinois enacted a new statute requiring the mandatory arbitration of collision subrogation claims involving less than $2,500. The new § 143.24d required mandatory, binding arbitration of smaller property subrogation cases between all auto carriers, whether a member of arbitration or not.

On December 18, 2013, § 143.24d was held unconstitutional by the Illinois Court of Appeals. Interstate Bankers Casualty Co. v. Hernandez, 3 N.E.3d 353 (Ill. App. [3rd Division] 2013). The court held that a common law property subrogation claim is basically an action for negligence and, therefore, constitutes a common law action which carries with them the right to a trial by jury at the time of the adoption of the 1970 Illinois Constitution.

In Hernandez, an accident occurring on January 9, 2012 – nine days after § 143.24d was enacted – resulted in property damage to a vehicle insured for collision coverage under a policy issued by Interstate. Interstate filed a subrogation suit against the third party seeking $1,154.47 in property damage. The defendant moved to dismiss the lawsuit on the grounds that § 143.24d barred the claim and the parties were required to submit their claims to mandatory binding arbitration pursuant to the Nationwide Inter-Company Arbitration Agreement (NICAA) as required by the statute. Interstate argued that §143.24d was unconstitutional because it deprived plaintiffs asserting negligence claims of their constitutional right to trial by jury. The trial court dismissed the suit and Interstate appealed. On December 18, 2013, the Court of Appeals declared that § 143.24d was unconstitutional. However, it would be the Illinois Legislature with the last laugh.

The Hernandez decision declared that the constitutional guarantee of a jury trial applied to actions arising from common law, not statutory or other special actions. It distinguished the 1999 Illinois Supreme Court decision of Reed v. Farmers Insurance Group, 720 N.E.2d 1052 (Ill. 1999), which upheld the constitutionality of a parallel mandatory arbitration statute in § 143a(1) involving the mandatory arbitration of uninsured motorist claims. The Court said that § 143a(1) was created by statute and did not exist as common law. The Hernandez Court said that the right to trial by jury attaches to subrogation actions, even though they arose in equity, because they evolved into and became an “integral” part of the common law. It declared the entire statute unconstitutional. The decision was not appealed to the Illinois Supreme Court.

Following the Hernandez decision, the Illinois Legislature amended § 143.24d, adding a single sentence which makes arbitration mandatory, but non-binding. Public Act 098-0864, amending 215 I.L.C.S. § 5/143a(1) effective January 1, 2015. The sentence added reads:

Nothing in this Section shall preclude a party from seeking resolution in a court of competent jurisdiction after a decision has been rendered in arbitration.

After its amendment, the statute reads as follows:

§ 143.24d. Arbitration of physical damage subrogation claims between insurers in certain cases.

(a) With respect to physical damage subrogation claims arising from auto damages incurred on or after January 1, 2012, insurers shall arbitrate and settle such claims where the amount in controversy, exclusive of the costs of the arbitration, is less than $2,500. Such arbitration shall be in accordance with the terms of and rules adopted pursuant to the Nationwide Inter-Company Arbitration Agreement, or any successor thereto, as adopted and from time to time amended by its members, unless the parties on a case-by-case basis mutually agree to use another forum; the alternate forum may include a court of competent jurisdiction, in which case the claim shall be arbitrated or tried in that alternate forum. Mandatory arbitration of disputed claims shall be limited solely to the issues of liability and damages. Nothing in this Section shall preclude a party from seeking resolution in a court of competent jurisdiction after a decision has been rendered in an arbitration.

(b) Nothing in this Section shall be interpreted to require an insurer to become a member of any organization or to sign the Nationwide Inter-Company Arbitration Agreement. 215 I.L.C.S. § 5/143.24d (Effective January 1, 2015).

Section 143.24d now provides that all automobile insurers must arbitrate and settle all subrogation claims made for automobile physical damages of less than $2,500 between them in accordance with the terms of and rules adopted pursuant to Arbitration Forum’s Auto Agreement (previously called the Nationwide Inter-Company Arbitration Agreement), unless the carriers agree to use another forum. This mandatory arbitration is limited solely to the issues of liability and damages, not coverage. An insurer does not need to be a signatory to arbitration to be compelled to arbitrate, because arbitration is mandatory. An insurance company only needs to sign the Arbitration Forum’s Automobile Subrogation Arbitration Agreement if it desires to become a signatory and arbitrate automobile disputes up to $100,000. If there is a counterclaim in excess of $2,500, the claim that meets the mandatory limit of $2,500 will proceed to arbitration and the other claim will not, unless both parties agree to arbitrate or both parties are members of arbitration.

The insured’s deductible is not included in the $2,500 mandatory limit. 215 I.L.C.S. § 143.24d. Section 143.24d provides that arbitration will be administered in accordance with the terms and rules adopted pursuant to Arbitration Forum’s Auto Agreement. Pursuant to Arbitration Forum’s Rule 1-3, the dollar limit applies only to the carrier’s interest. It does not include the insured’s deductible. Notwithstanding this, Arbitration Forum’s Rule 5-3 provides that the deductible must be included with any award payment in the interest of good will. Therefore, the amount recovered under this mandatory arbitration law could exceed $2,500 if the insured’s deductible took it over the limit.

According to Arbitration Forum’s website, if the applicant files a claim for $2,300 and subsequently amends its filing (prior to it being heard) to include a $500 supplement, the amount sought will now equal $2,800, which exceeds the mandatory limit. When answering, the respondent can assert the affirmative defense of no jurisdiction or it can argue the issues of liability and/or damages and have arbitration retain jurisdiction over the dispute. On the other hand, if the applicant files a claim for $2,300; the case is heard, and an award is given at 100 percent; and then subsequently has a $500 supplement, it can file arbitration to recover the $500 supplement (see Rule 5-3). Each filing is independent except for the liability decision, which is res judicata. The only issue on the supplemental filing is damages, assuming they are disputed. If not in dispute, they should simply be paid. If the subrogated carrier does not agree to binding arbitration, either party may seek resolution in a court of competent jurisdiction even after an arbitration decision has been rendered. Id.

Why Interstate Bankers Casualty Company, or any automobile carrier, would not prefer the ease and low cost of arbitrating smaller physical damage subrogation claims is open to debate. However, the attorneys who handled the Hernandez case suggest that some carriers prefer the civil litigation process to the inconsistency of arbitration decisions. Last month, however, the Illinois Legislature got the last laugh with regard to § 143.24d. Carriers must now arbitrate these claims. Although the decision is non-binding, the likelihood that both parties will simply agree to be bound by the arbitration decision in order to avoid having to litigate in addition to arbitrating the matter is greatly increased.